Absorption and Variable Costing

CHAPTER 8 ABSORPTION AND uncertain personifyINGLearning Objectives 1. Explain the accounting handling of persistent manufacturing hit under absorption and multivariate be. 2. Prepare an income tilt under absorption representing. 3. Prepare an income argumentation under versatile belling. 4. hold reported income under absorption and variable costing. 5. Explain the implications of absorption and variable costing for cost-volume-profit analysis. 6. Evaluate absorption and variable costing. 7. Explain the rationale can throughput costing. . Prepare an income statement under throughput costing. Chapter Overview I. Product Cost and stubborn Manufacturing everyplacehead A. engrossment-costing income statements B. variable star-costing income statements II. Reconciliation of Absorption- and Variable-Costing Income A. No change in inventory levels B. Increase in inventory levels C. Decrease in inventory levels III. Overall Evaluation of Absorption and Variable Costing IV. T hroughput Costing Key Lecture Concepts 1.PRODUCT COST AND FIXED MANUFACTURING OVERHEADProduct, or manufacturing, costs are comprised of take on materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead. The basic difference mingled with absorption and variable costing is the treatment of fixed manufacturing overhead. * With absorption (full) costing, all costs tie in to the manufacture of a good are production costs. Therefore, fixed manufacturing overhead attaches to the wholes cosmos made and is carried in inventory until the product is sold. * Absorption costing results in the preparation of a traditional income statement. Absorption costing is considered generally accepted accounting principles and is acceptable for tax reporting. * downstairs variable costing, product cost is comprised merely of variable manufacturing costs. Fixed manufacturing overhead is viewed as a cost of being ready to produce, not an actual production cost (i. e. , the cost bequeath remain constant no matter how many units are manufacture). * Fixed manufacturing overhead is treated as a period cost and expensed immediately. * The income statement highlights cost behavior and is presented in a contribution margin format. Variable costing is dropful to managers, as it dovetails nicely with cost-volume-profit analysis.2. RECONCILIATION OF ABSORPTION- AND VARIABLE- be INCOME* The difference amid the devil approaches is the timing of when fixed manufacturing overhead is shown on the income statement when the product is sold under absorption costing and when incurred under variable costing. * The two methods exit usually produce different income figures. * No change in inventory production = sales * below variable costing, all fixed manufacturing overhead is expensed.With absorption costing, the periods fixed overhead flows through to cost of goods sold. * Absorption-costing realise income equals variable-costing net income. * Increase in inv entory production sales * Under variable costing, all fixed manufacturing overhead is expensed. With absorption costing, a parcel of land of the periods fixed overhead flows through to cost of goods sold and a dole out remains on the balance sheet in inventory. * Absorption-costing net income is great than variable-costing net income. * Decrease in inventory sales > production Under variable costing, all fixed manufacturing overhead is expensed. With absorption costing, as units manufactured in a prior period are sold, an amount greater than the current periods fixed overhead flows through to cost of goods sold. * Absorption-costing net income is less(prenominal) than variable-costing net income. * The difference between absorption- and variable-costing income figures can be reconciled as follows Income difference = Inventory change in units x Fixed overhead per unit The difference is likely to be very small over a lengthy time period.3. OVERALL EVALUATION OF ABSORPTION AND VA RIABLE COSTING* Pricing decisions * Absorption-cost proponents argue that fixed manufacturing overhead is a essential production cost. Excluding this element from the inventoried cost of a product will denigrate the goods cost, which is troublesome for companies that use cost-based pricing techniques. * Variable-cost proponents argue that variable cost is fracture for pricing decisions. Any price above a goods variable cost results in a positive contribution margin for the company. Many firms use variable costing for internal-reporting purposes. Given that absorption costing must be employed for external financial reporting, companies can use both methods by making several simple end-of-period adjustments. 1 If a company operates in a just-in-time environment, inventories are kept very low and there will be little change in inventory from period to period. Thus, the income differences between absorption and variable costing will normally be insignificant.4. THROUGHPUT COSTING Thro ughput costing assigns only the unit-level spending for direct costs as the cost of products or services. * A unit-level cost is incurred every time that a unit of product is manufactured. * All costs other than the throughput cost are considered to be operating expenses of the period. * Proponents of throughput costing argue that this procedure eliminates the incentive to produce nimiety inventory because all non-throughput costs are expensed regardless of manufacturing volume.